Porsche wins dismissal of U.S. hedge fund lawsuit over VW

December 27, 2012|Jonathan Stempel | Reuters

(ALEX DOMANSKI, REUTERS)

NEW YORK (Reuters) - Porsche Automobil Holding SE on Thursday won the dismissal of a New York lawsuit by 26 hedge funds that accused the German automaker of causing more than $1 billion of losses by cornering the market in Volkswagen AG shares.

A five-justice panel of the New York State appeals court in Manhattan unanimously found that Porsche had met its "heavy burden" to establish that the state was the wrong place in which to bring the lawsuit.

That panel reversed an August 6 ruling by New York State Supreme Court Justice Charles Ramos that let the case by hedge funds including Glenhill Capital LP, David Einhorn's Greenlight Capital LP and Chase Coleman's Tiger Global LP proceed.

The funds accused Porsche of engineering a "massive short squeeze" in October 2008 by quietly buying nearly all freely traded ordinary VW shares in a bid to take over the company, despite publicly stating it had no plans to take a 75 percent stake.

When Porsche revealed it had amassed control of roughly three-quarters of VW, shares of VW soared, briefly making the Wolfsburg-based carmaker the world's biggest company by market value. The surge caused losses for hedge funds that had bet on a decline in the stock price.

Thursday's decision is a defeat for sophisticated and ordinary investors, who may have hoped they could use U.S. state courts to bring fraud claims against foreign companies over alleged misconduct taking place outside the United States.

In 2010, the U.S. Supreme Court made it significantly harder for investors to pursue such claims in federal courts, in the case Morrison vs. National Australia Bank Ltd

"The appeals court squarely rejected the plaintiffs' attempt to end-run Morrison by suing in a state court," Robert Giuffra, a partner at Sullivan & Cromwell representing Porsche, said in a phone interview.

James Heaton, a partner at Bartlit Beck Herman Palenchar & Scott in Chicago who argued the appeal for the hedge funds, had no immediate comment. The decision was issued by a court one level below the Court of Appeals, the New York's highest state court.

Last week, prosecutors in Porsche's hometown of Stuttgart announced market manipulation charges against former Porsche Chief Executive Wendelin Wiedeking and former Chief Financial Officer Holger Haerter tied to the VW purchases. The defendants' lawyers denied wrongdoing by their clients.

INCONVENIENT FORUM

In its unsigned decision, the New York appeals court said the case was more appropriate for Germany, where litigation is also ongoing.

The appeals court said the hedge funds had failed to show that Porsche's actions created a "substantial nexus" with New York, noting that only links to the state were various phone calls and emails.

It added that most parties in the case are not New York residents, VW stock is traded only on foreign exchanges, and many witnesses and documents are in Germany.

"Porsche met its heavy burden to establish that New York was an inconvenient forum," the court said.

Several hedge funds in the case, plus others such as Elliott Associates LP, had brought a similar $2 billion lawsuit against Porsche in federal court, but U.S. District Judge Harold Baer in Manhattan dismissed that case in December 2010, citing Morrison.

The hedge funds appealed Baer's dismissal to the federal appeals court in New York, which heard oral arguments in February. That court has not yet issued a decision.

Wiedeking's maneuvering to take over VW backfired and pushed Porsche close to bankruptcy.

In July, VW ended up buying the 50.1 percent of Porsche's sports car business that it did not already own for 4.46 billion euros (US$5.9 billion). [ID:nL6E8I52V2] That ended a seven-year feud between branches of the companies' founding family.

VW is Europe's largest carmaker, and has plans to become the world's largest by 2018.

Ferdinand Porsche, the founder of his namesake sports car company, also invented the Volkswagen Beetle.